GENERIC DRUG PRICING AND ACCESS IN CANADA: WHAT ARE THE IMPLICATIONS?

Transcription

1 GENERIC DRUG PRICING AND ACCESS IN CANADA: WHAT ARE THE IMPLICATIONS? A commissioned discussion paper by SECOR Consulting. JUNE 2010

2 TABLE OF CONTENTS 02 Foreword 03 Introduction 04 Executive Summary Why Should Generic Drugs Matter to Canadians? Overview of Generic Drugs Coverage and Reimbursement Policies Key Stakeholders Critical Success Factors and Options for Achieving Them 28 (A) Effective Pricing Strategies 30 (B) Appropriate and Efficient Use of Generics 31 (C) Alternative Drug-Distribution Channels 32 (D) Diverse Offering of Pharmacy Services 33 (E) High Consumer Involvement 34 (F) Optimal Government Involvement Options for Policy-Makers Appendix: Recently Proposed Changes to Ontario s Generic Drug Policies and Regulations 41 References 44 About the Health Council of Canada The Health Council of Canada would like to acknowledge funding support from Health Canada. The views expressed here do not necessarily represent the views of Health Canada. To reach the Health Council of Canada: Suite 900, 90 Eglinton Avenue East Toronto, ON M4P 2Y3 Telephone: Fax: information@healthcouncilcanada.ca Generic Drug Pricing and Access in Canada: What are the Implications? June 2010 ISBN How to cite this publication: Bell C, Griller D, Lawson J, Lovren D. (2010). Generic Drug Pricing and Access in Canada: What are the Implications? Toronto: Health Council of Canada. Contents of this publication may be reproduced in whole or in part provided the intended use is for non-commercial purposes and full acknowledgement is given to the author(s) and to Health Council of Canada as publisher Health Council of Canada Cette publication est aussi disponible en français.

3 GENERIC DRUG PRICING AND ACCESS IN CANADA 1 GENERIC DRUG PRICING AND ACCESS IN CANADA: WHAT ARE THE IMPLICATIONS? A commissioned discussion paper by SECOR Consulting. June 2010 Dr. Chaim Bell (Keenan Research Centre in the Li Ka Shing Knowledge Institute of St. Michael's Hospital, and University of Toronto) Dr. David Griller (SECOR Consulting) Joshua Lawson (SECOR Consulting) Dusan Lovren (SECOR Consulting)

4 2 HEALTH COUNCIL OF CANADA FOREWORD Prescription drugs account for an increasing proportion of Canada s growing health care system with rising costs that governments in this country are seeking ways to restrain. The greater use of generic drugs, for which Canadians pay some of the highest prices in the world, accounts for a significant portion of these rising costs. The Health Council of Canada commissioned this independent discussion paper to provide Canadians with some further insight into the generic drug sector and potential options to reduce generic drug prices. Generic drugs are essentially copies made of brand name drugs after their patent protection has expired. Currently, more than half of the prescriptions written in Canada are for generic drugs a proportion that is likely to rise as several widely prescribed drugs come off patent in the next few years. Generic drugs are less expensive than their brand name counterparts and play an important role in helping to improve access to required prescriptions and to contain health care costs. However, there has been cause for concern for some time about generic drug prices in this country. For example, a 2006 study on non-patented drug prices, conducted by the Patented Medicine Prices Review Board, found average international prices for generic drugs in 10 developed countries to be 15-77% lower than average Canadian prices. Canada s relatively high generic drug prices contribute to increased health care costs, put a strain on provincial drug program budgets, and can have a negative impact on Canadians access to medicines and health care. In recognition of these realities, the 2003 First Ministers Accord on Health Care Renewal pledged to better manage the costs of all drugs, including generic drugs. As part of the Year Plan to Strengthen Health Care, First Ministers further stated that they wanted to accelerate access to non-patented (generic) drugs and achieve international parity on prices within the context of a national pharmaceuticals strategy. Since then, persistent concern about generic drug pricing in Canada prompted the Competition Bureau to publish two reports. The 2007 Canadian Generic Drug Sector Study examined the way that generic drugs are marketed in Canada and stated that the design of drug plans has not resulted in the benefits of [generic drug] competition being passed along to Canadians in the form of lower prices. The Bureau s 2008 report, Benefiting from Generic Drug Competition in Canada: The Way Forward, suggested some mechanisms to bring down prices and concluded that Canadian taxpayers, consumers, and businesses could save up to $800 million a year if changes were made to the way that generic drugs are paid for by governments and private plans. In recent years some provincial governments, which are major payers for prescription drugs, have launched initiatives to bring down generic drug costs. Yet for most Canadians, the issues concerning generic drug pricing remain elusive. This discussion paper highlights the complex reasons associated with the high cost of generic drugs and the longstanding lack of transparency about how prices are set. Potential options for governments to consider in order to institute reforms, reduce costs, and increase the transparency of generic drug transactions are presented. Our goal in publishing this discussion paper is to shed light on generic drug pricing issues in order to help Canadians understand what is at stake and to encourage broad public discussion. Jeanne Besner, RN, PhD Chair, Health Council of Canada

5 GENERIC DRUG PRICING AND ACCESS IN CANADA 3 INTRODUCTION Rapidly rising expenditures on prescription drugs are of serious concern to individual Canadians and to private and public insurers. Our spending on drugs is growing mainly because we are using more of them. The average age of the population is rising and many Canadians are now living with chronic conditions such as heart disease and diabetes. Drugs are helping us to live longer and to keep us out of hospital but these benefits come at a price. Faced with tough economic times, provincial and territorial drug plans are looking for ways to restrain their multi-billiondollar share of the country s annual bill for prescription drugs. Since 2006, some provinces (British Columbia, Alberta, Manitoba, Ontario, Quebec, and Newfoundland and Labrador) have taken steps to rein drug prices in, while improving access. This discussion paper aims to provide policy-makers, other key stakeholders, and the Canadian public with substantive discussion on the short- and long-term implications of generic drug pricing and reimbursement policies in Canada. The paper shines a light on the issues at play and on related developments within the jurisdictions, and informs Canadians and stakeholders about this important issue against a backdrop of the global economic crisis, growing drug utilization, and a progressively aging population with an increasing percentage of Canadians living with multiple chronic conditions. SECOR gathered opinions from a broad range of stakeholders and experts, including provincial drug-plan managers, private drug-plan consultants, industry association representatives (manufacturing and pharmacy), patient advocacy representatives, and federal government officials, as well as Canadian and international researchers. In addition to the insights provided by stakeholders, SECOR conducted an extensive review of the literature on generic drug pricing and access. In particular, two reports published by the Competition Bureau in 2007 (Canadian Generic Drug Sector Study), and 2008 (Benefiting from Generic Drug Competition in Canada), formed a valuable foundation for the discussion.

6 4 HEALTH COUNCIL OF CANADA EXECUTIVE SUMMARY Prescription drugs developed over the last 40 years have transformed the practice of medicine. They provide treatments that can cure or help control such conditions as asthma, diabetes, heart disease, bacterial infections, depression, HIV/AIDS, and some forms of cancer. As innovations in prescription drugs have advanced, so has spending on these products, which are now an important component of health care expenditure. Brand name drug companies conduct the expensive research and development required to bring an innovative (i.e. new) drug to the market. They enjoy the benefit of patent protection for a limited period during which they have market exclusivity, in order to recover their research and development expenditures and make a profit. Then, when patents on innovative drugs expire, generic drug companies are free to make their own versions. These drugs are termed generic drugs and contain the same medicinal ingredients as the original brand name products, but may contain different non-medicinal ingredients. Both brand name and generic drugs can be sold in Canada only after they have received a Notice of Compliance (NOC) from Health Canada attesting to their safety, quality, and efficacy. In proving the safety and efficacy of their products, generic drug manufacturers are not required to repeat the expensive clinical studies that brand name firms must undertake. Consequently, they are able to charge lower prices for their products. a An aging population, along with an increasing number of individuals living with multiple chronic illnesses, means that many more Canadians will require access to prescription medications. Generic drugs play an important role in containing the expenditures on prescription drugs and enhancing accessibility for a cost-sensitive segment of the population who may not be able to afford the more expensive brand name drugs. This increase in accessibility may lead to better adherence to prescribed medication and consequently to improved health outcomes. Pricing in the generic market is primarily driven by provincial and territorial drug plans. The plans have traditionally reimbursed generic drugs by paying a percentage of the price of the brand name drug or by paying a price quoted by a generic drug manufacturer. In the early 1990s, government drug plans set prices for generic drugs at a relatively high percentage of the price of the brand name drugs they emulated. Naturally, pharmacies typically billed governments the maximum allowable amounts. Generous profits in the supply chain benefited generic drug manufacturers and encouraged the proliferation of retail pharmacies. Initially, the manufacturers held sway over the pharmacies, and encouraged their purchasingloyalty by offering them rebates. b Pharmacies reaped the benefits of reduced drug-acquisition costs and these became an integral part of their retail business model, allowing the number of pharmacies to grow. Over time, the agglomeration of retail pharmacies into franchises, chains, and banner groups shifted the balance of power these pharmacies could now drive their drug-acquisition costs further down by demanding ever-deeper rebates from the manufacturers. These rebates also referred to as professional allowances and off-invoice discounts became the primary lever through which generic firms competed for pharmacy shelf space. The market dynamics that governments themselves had a hand in creating ultimately became a source of frustration for them. Realizing they were allocating too much profit to the supply chain they began to reduce reimbursement rates. At the same time, governments noted the lack of transparency as to how profits in the supply chain are distributed. They are faced with the challenge of not knowing how much profit can be squeezed from the supply chain through reductions in reimbursement levels before the chain is damaged. Creating a more sustainable drug system that addresses people s needs at an affordable cost is not simple. Finding solutions that meet this goal and minimize the negative impacts on key stakeholders is an even greater challenge. The impacts of an aging population along with an a Generic firms charge lower prices for their products not only due to their relatively low research and development costs, but also due to the effects of competition. Competition puts downward pressure on generic drug prices, but is absent in the patented drug market. b The terms rebates, professional allowances, and off-invoice discounts are used interchangeably throughout the report.

7 GENERIC DRUG PRICING AND ACCESS IN CANADA 5 increasing number of individuals living with multiple chronic conditions further compound the problem of creating a sustainable system. Based on interviews with key stakeholders, researchers, and representatives from other jurisdictions, six critical success factors that can improve affordability, accessibility, and sustainability emerged (Figure 3, page 27): (A) Effective pricing strategies Pricing strategies work well when they reflect the true costs of manufacturing generic drugs and incorporate reasonable profit margins along the supply chain. A 2008 comparison of prices paid by Canadian and international jurisdictions suggests that Canadian payers are reimbursing generic drugs well beyond their true cost, and the excess is being passed along the supply chain to the consumer. Recently proposed changes in Ontario seek to redress the problem, but some commentators suggest they go too far and could actually impact access to pharmacy services through, for example, reduced hours of operation. (B) Appropriate and efficient use of generics Use of cheaper generic drugs in place of their brand name equivalents is an important source of savings for all payers. Currently, both regulatory and financial incentives in Canada encourage the use of generic pharmaceuticals. (C) Alternative drug distribution channels Alternative drug-distribution channels offer improved accessibility and are a source of potential cost savings. Most Canadians obtain their prescription medications directly from a pharmacist in a community pharmacy the prevalence of other drug distribution channels in Canada is currently limited. (D) Diverse offering of pharmacy services Typical non-dispensing pharmacy services include or could include blood tests, diabetes care, smoking cessation management, vaccinations, the provision of initial treatment for minor ailments, and cholesterol-control consultations, as well as some prescribing privileges. Relatively few Canadian pharmacies offer more than one of these value-added services, even though the scope of the pharmacist s role has recently been expanded to allow the provision of some of these and other basic medical services. (E) High consumer involvement A higher level of consumer involvement in drug-purchasing decisions could push pharmacy retailers to compete more aggressively on prices. In the current system, consumers have little purchasing power or influence, which allows pharmacies to largely avoid competing on price. (F) Optimal government involvement Governments are major players in the generic drug market since they are major purchasers of drugs. Through this power and through legislative authority, they can effectively set prices. However, they are also concerned with maintaining an effective supply chain. They want to ensure that all links in the chain can make reasonable but not excessive profits. Given that governments play multiple roles as regulators, price setters, and purchasers, they need to optimize their involvement in the marketplace so that all stakeholders are treated fairly. In addition to these success factors, the consultations with key stakeholders identified a number of key messages regarding existing trends in Canada: While provinces and territories regularly share information with each other, interjurisdictional collaboration on key policy decisions is not as extensive as it could, and needs, to be. The gap between public and private insurance costs continues to widen. Many provincial and territorial drug-plan policies on pricing are not extended to private insurance markets. The balance of power in the generic drug market has shifted from manufacturers to pharmacy groups, with competition increasing in the manufacturing sector, and with retail pharmacy groups (e.g. chains and franchises) becoming more dominant in the pharmacy sector. Benefits of competition at the manufacturing level are absorbed by pharmacies and are not being passed on to consumers and payers. A lack of transparency in the system, particularly in determining manufacturer prices net of any off-invoice discounts, has made it difficult for governments to develop effective policies.

8 6 HEALTH COUNCIL OF CANADA Access to drugs is largely not seen as a significant public policy issue in most Canadian jurisdictions given that most Canadians have some form of drug insurance, even though some may still be facing high out-of-pocket costs. In the short term, policy-makers could take a number of approaches that would improve affordability, accessibility, sustainability, and transparency, while at the same time minimizing any potential negative impacts on key stakeholders. For example: Drug insurance plans could revisit their maximum reimbursement prices since a body of evidence suggests that Canadian prices are too high. Drug plans could use Canadian industry information and pricing data from other countries for guidance. This approach mirrors the actions that many provinces are already taking and is basically an extension of the status quo. If governments are to continue to intervene in the market, they need to ensure that public plans do not achieve lower prices at the expense of private plans. They need to ensure that private plans do not pay more than public plans either by making pricing well-known or through regulation. Reimbursement prices could be set at the pharmacy level. Governments have constructed reimbursement prices by setting a price for a drug, and by adding distribution costs, profit margins, and dispensing fees for pharmacies. Much to the frustration of governments, manufacturers have competed with each other by offering rebates to pharmacies. Offering discounts and rebates to purchasers is a normal commercial practice that governments have tried without success to suppress. Governments could reimburse pharmacies a single amount, which includes the actual cost of the drug, wholesaler fees, and pharmacy fees for dispensing and counselling. Drug plans, including employer-sponsored plans, could use tiered formularies to encourage their beneficiaries to use low-cost drugs. Tiered formularies and their associated patient co-payments effectively sensitize the consumer to the cost of medications. However, care must be taken to ensure that patients continue to take appropriate drugs both for their own benefit and because inferior health outcomes would cost the health system more than any monies saved. Provincial and territorial drug plans could ensure that newly approved drugs are listed on their formularies in a timely manner. Currently, the formulary listing process can take several months from the time the drug has received its Notice of Compliance from Health Canada. This delay in listing newly approved drugs results, for instance, in public drug plans paying additional money for a brand name drug, even though a lower-cost generic version is available. Using the pharmacist to provide additional paid services would moderate the impact of reducing generic drug prices and benefit the health care system. Given that the Canadian population is aging, the prevalence of chronic disease is increasing, and medical-service demand is growing, expanding the role of the pharmacist could be of great value for both the patient (improved outcomes and access) and the health care system (improved sustainability). The use of alternative and competing distribution channels could be encouraged. With more alternatives in the retail market (e.g., mail-order pharmacies and automated dispensaries), competition would increase to the benefit of all payers. Consumer preferences will ultimately dictate how pervasive these channels become and consequently the magnitude of potential impacts. However, regulators should ensure that any barriers to the success of these service-delivery channels are removed.

9 GENERIC DRUG PRICING AND ACCESS IN CANADA 7 SECTION 1: WHY SHOULD GENERIC DRUGS MATTER TO CANADIANS? Prescription drugs developed over the last 40 years have transformed the practice of medicine. They provide treatments that can cure or help control such conditions as asthma, diabetes, heart disease, bacterial infections, depression, HIV/AIDS, and some forms of cancer. As innovations in prescription drugs have advanced, so has spending on these products so that they are now an important component of health care expenditure. Spending on prescription drugs in Canada was estimated by the Canadian Institute for Health Information (CIHI) at roughly $25.4 billion in The annual growth rate for total drug expenditure outpaced that of total health expenditure from 1985 to 2005 and these rates have been fairly equivalent since. Prescription drugs accounted for 67.5% of total drug spending in 1985, rose to 83.1% in 2007, and are estimated to have accounted for 84.6% of total drug expenditure in Brand name drug companies conduct the expensive research and development required to bring an innovative drug to market. They enjoy the benefit of patent protection for a limited period (typically 20 years 2, 3 ) c during which they have market exclusivity, in order to recover their research and development expenditures and make a profit. When patents on innovative drugs expire, generic drug companies d are free to make their own versions. These are termed generic drugs and contain the same medicinal ingredients as the original brand name product, but may contain different non-medicinal ingredients. A generic drug must show that it can deliver the same amount of medicinal ingredient in the blood at the same rate as the brand name drug. 4 The rate and extent of absorption of the drug in the patient s body must fall within an acceptable range of the brand name product. 3 Both brand name and generic drugs can be sold in Canada only after they have received a Notice of Compliance (NOC) from Health Canada attesting to their safety, quality, and efficacy. 5 Upon patent expiry of the brand name drug, generic manufacturers must demonstrate how the generic product performs in comparison to the brand name product, among other requirements. 3 However, in proving the safety and efficacy of their products, generic drug manufacturers are not required to repeat the expensive clinical studies that innovative firms must undertake, and hence are able to charge lower prices for their products. e PRESCRIPTION VOLUME AND DRUG SALES IN CANADA (2009) 46% 54% Prescription Volume (482.7 million) 76% 24% Sales ($21.5 billion) Brand Generic The price difference between brand name and generic products is best illustrated by examining prescription volume and total drug sales. Generic drugs account for 54% of all prescriptions in Canada, but represent only 24% of prescription drug sales, in terms of total value. 6 c Because some manufacturers may obtain more than one patent for a particular drug, the period of patent protection may, in some cases, last more than 20 years. Under these circumstances, the drug will be under patent protection until the last of the filed patents has expired (assuming none of the patents have been proven invalid by another manufacturer). 3 d In some cases, brand name firms also choose to manufacture their own generic drugs. Please see Brand Name Manufacturers in Section 4: Key Stakeholders, for further discussion. e Please refer to footnote a on page 4.

10 8 HEALTH COUNCIL OF CANADA Generic drugs and the policies that regulate their pricing and accessibility should and do matter to Canadians, for the following three reasons: Generic drugs play an important role in containing expenditures on prescription drugs. Pharmaceutical products are, in part, paid for by taxpayers whose money funds provincial drug plans and by employers who, in the main, pay for private drug plans. Generic drugs, as lower-cost alternatives to off-patent brand name drugs, help contain expenditures on pharmaceuticals. While substitution of a generic drug for a brand name drug is not always appropriate, f in most cases generic drugs do represent a viable alternative. The use of generic drugs is growing because brand name drugs such as astorvastatin (Lipitor ) and amlodipine (Norvasc ) have come off patent, and will continue to grow as other blockbuster brand name drugs come off patent in the next few years. The projected increase in use of generic drugs will provide a significant source of long-term savings on drug expenditures for all payers. The importance of containing costs over the long term should not be understated given the projected impact of demographics on drug use. An aging population, along with an increasing number of individuals living with multiple chronic conditions, means that many more Canadians will require access to prescription medications. In fact, individuals over age 65 account for 41% of retail pharmaceutical spending with individuals between the ages of 45 and 64 accounting for a further 36%. 7 Generic drugs also play an important role in enhancing accessibility for a cost-sensitive segment of the population who may not be able to afford the more expensive brand name drugs. This increase in accessibility may lead to better adherence to prescribed medication and consequently to improved health outcomes. Generic drug prices also permit drug plans to offer more generous coverage, which may also lead to improved adherence and health outcomes. Canadians pay too much for generic drugs. In 2007, Canada was second only to the US in total drug expenditure per capita among 23 Organisation for Economic Co-operation and Development (OECD) comparator countries. 1 Patented brand name prices at the manufacturing level are held in check by the Patented Medicine Prices Review Board (PMPRB). 8 One price-control mechanism used by the PMPRB is to limit prices of patented drugs in Canada to the median price found in seven industrialized nations. 9 However, no such mechanisms are in place to regulate generic drug pricing. In other words, price regulation to explicitly ensure that generic prices in Canada are in line with those in other jurisdictions is absent. 8 Prices of generics in Canada are among the highest in the industrialized world. AVERAGE FOREIGN-TO-CANADIAN PRICE RATIO AT MARKET EXCHANGE RATES, PATENTED, GENERIC AND NON-PATENTED BRANDED PRESCRIPTION DRUG MARKET SEGMENTS, BY BILATERAL COMPARATOR (2005) According to a 2006 study by the PMPRB, generic drug prices in Canada are higher, and in most cases substantially higher, than in all 11 countries in the study. 10 Other studies that have examined generic drug prices reached similar conclusions. While generic drug prices in some Canadian jurisdictions have decreased since 2006, they are still higher than in many countries listed in this table. g, 11 Country Patented Generic Non-Patented Branded Australia Finland France Germany Italy Netherlands New Zealand Spain Switzerland UK US f Generic drug substitution may not always be appropriate given that there are some variations between brand name and generic drugs, as discussed further in Section 2. g Based on Ontario s reimbursement prices as of 2009.

11 GENERIC DRUG PRICING AND ACCESS IN CANADA 9 The generic drug market lacks transparency. h Provincial and territorial governments are major payers for pharmaceutical products. As a consequence, their policies have a profound effect on the operation of the Canadian market. i As drivers of price in the generic drug market, our public drug plans have traditionally reimbursed generic drugs at a percentage of the brand name price, or at a price quoted by the generic drug manufacturer. Most plans also allow the pharmacist a mark-up and a dispensing fee. However, private drug plans and patients paying for drugs from their own pockets may be charged more or less than public plans for each of these components. One of the main irritants in the generic market is the way in which the drug reimbursement amount set by the insurer is allocated between manufacturers, wholesalers, and pharmacies. In recent years, retail pharmacy chains and franchises have come to dominate the Canadian sector. 3 Exercising considerable purchasing power, they have been able to extract substantial rebates from manufacturers. Independent pharmacies have also been able to extract rebates from manufacturers, though likely not at the same level as pharmacy chains and franchises. Governments have, from time to time, tried to control these practices but with limited success. While individual provincial and territorial drug plans may apply one set of pricing and rebate rules, these can be circumvented by pharmacy retail groups and manufacturers who establish alternate compensation mechanisms through private plans or reimbursement programs in other provinces. These conditions have led policy-makers to consider the following questions: What should Canadians pay for generic drugs? What profits should manufacturers, wholesalers, and retail pharmacies capture? To what extent should governments intervene in the management of private plans to establish an equitable market? Should provinces and territories harmonize their approaches? The National Pharmaceuticals Strategy (NPS) j was intended to assist policy-makers in answering some of these questions by developing nationwide sustainable solutions addressing the safety, accessibility, and affordability of drugs. Among other objectives, the NPS aimed to: 13 find ways to reduce the costs of prescription medications to governments and individual Canadians; ensure that all Canadians have access to the same prescription drugs through their government drug plans, based on a common national formulary; and develop options for a nationwide plan for catastrophic drug coverage to ensure that Canadians don t face undue financial hardship to pay for prescription medications they need, regardless of where they live (catastrophic refers to the impact on a person s finances, not to his or her medical condition). A 2009 report by the Health Council of Canada found that provincial and territorial governments have proceeded with their own drug reforms, but cooperation among the jurisdictions on a national effort was lost. 14 Since then, both Alberta and Ontario have announced significant reforms to their own policies, but a national strategy is still not in place. h A lack of transparency is also an issue in the brand name drug market. For instance, in Ontario, the public drug plan can negotiate secret rebates with brand name manufacturers, allowing the manufacturer to list one price on the formulary and pay secret rebates directly to the Ontario Drug Benefit (ODB) Program. This strategy allows the brand name manufacturer to maintain the ODB prices in the private market and other provinces. 12 i Federal reimbursement policies are not discussed in this paper. As stated under Coverage Policy in Section 3: Coverage and Reimbursement Policies, federal drug plans cover a relatively small portion of Canadians. Interviews with jurisdictional informants have indicated that federal reimbursement policies typically closely follow the mechanism used by the province or territory where the federal-plan beneficiary resides. j The First Ministers recommended a National Pharmaceuticals Strategy as part of their 10-Year Plan to Strengthen Health Care.

12 10 HEALTH COUNCIL OF CANADA SECTION 2: OVERVIEW OF GENERIC DRUGS Generic is the term used for a drug that contains the same medicinal ingredients as the original brand name product, but may contain different non-medicinal ingredients. The non-medicinal (inactive) ingredients affect the size and shape of the drug. 4 Since generic drug manufacturers are not required to carry out expensive chemical, animal, or human studies to prove the safety and efficacy of new products, they can offer their products at lower prices than those charged by brand name firms. k Brand name drugs can be sold in Canada only after they have received a NOC from Health Canada attesting to safety, quality, and efficacy. 15 When patents and data protection expire on these products, generic drug firms can enter the market. The generic manufacturers must also obtain a NOC, which requires them to conduct bioavailability studies or to demonstrate how their product performs in comparison to the brand name original. 3 Also, of course, they must conform to regulated high-quality manufacturing procedures. 16 Bioequivalence Health Canada defines bioequivalence as a high degree of similarity in the rate and extent of absorption into the systemic circulation of two comparable pharmaceutical products in the same dose, that are unlikely to produce clinically relevant differences in therapeutic effects or adverse effects, or both. 16 Comparing the rate and extent of absorption of brand name and generic drug products is usually done through comparative bioavailability studies. These studies typically measure generic drug levels in the blood of healthy human volunteers and compare them with those published for the brand name drug. Some tolerance is allowed for bioavailability difference between the generic and the brand. Health Canada relies on data that was used by the brand name firm in bringing the original drug to market. This data is protected for a period of eight years (from the time the brand name manufacturer applies for a NOC), during which it cannot be used to prove bioequivalence of generic drugs. 3, 4 Quality of Manufacturing Generic drug manufacturers are also subject to Good Manufacturing Practices (GMP) which ensure that drugs are produced consistently. These include the employment of qualified and trained personnel; adequate premises and space; suitable equipment and services; correct materials, containers, and labels; approved procedures and instructions; adequate testing; and suitable storage and transport. GMP also requires extensive documentation and traceability of all ingredients used and procedures carried out. 16, 17 Further, All establishments engaged in fabrication, packaging or labeling, importation, distribution, wholesale, or operation of a testing laboratory for drugs are required to hold an establishment license. The Health Products and Food Branch (HPFB) of Health Canada is responsible for the inspection of these establishments to verify that they comply with GMP. 16 Comparability with Brand Name Drugs Even though less effort is typically required for generic drugs to receive a NOC, both brand name and generic drugs are subject to the same safety, quality, and efficacy standards. 15 Hence, for most patients, a generic drug can be substituted for the original brand name drug, without any adverse effects or poorer health outcomes. However, differences between generic and brand name drugs with respect to the make-up of inactive ingredients may make generic substitution inappropriate for some patients. 18 k Please refer to footnote a on page 4.

13 GENERIC DRUG PRICING AND ACCESS IN CANADA 11 SECTION 3: COVERAGE AND REIMBURSEMENT POLICIES Drug insurance plans are designed to help people pay for prescription medications both brand name and generic and reduce their financial burden in the event of high or unexpected drug expenses. In fact, they cover roughly 98% of all Canadians, leaving only 2% of the population who must bear all drug costs on their own. These completely uninsured individuals are typically working-age with no employer-sponsored insurance (for instance, self-employed individuals). 3 However, even insured individuals may be facing high out-of-pocket expenses. Coverage Policy Drug insurance plans are designed to help people pay for prescription medications both brand name and generic and reduce their financial burden in the event of high or unexpected drug expenses. In fact, they cover roughly 98% of all Canadians, leaving only 2% of the population who must bear all drug costs on their own. These completely uninsured individuals are typically working-age with no employer-sponsored insurance (for instance, self-employed individuals). 3 However, even insured individuals may be facing high out-of-pocket expenses. Drug plans dictate eligibility requirements and the payments required by their beneficiaries. Eligibility requirements vary greatly among providers and can include any combination of age, place of residence, and income level, among others. Beneficiaries may have to pay premiums, deductibles, or co-payments, and these can vary depending on the beneficiary s level of income. 3 Public insurance plans cover roughly one third of the insured population, while private insurance plans cover the remaining two thirds. 3 These plans cover the cost of prescription medications outside of hospital settings. Generally, drugs administered in hospitals are provided free of charge under each of the provincial and territorial hospital insurance plans. Each provincial and territorial government as well as the federal government administers its own drug insurance plan. The federal government provides insurance coverage for about 1 million Canadians including First Nations and Inuit Peoples, veterans, members of the military, the RCMP, prisoners in federal correctional facilities, and refugees. 3 Provincial and territorial mandates for drug insurance are much broader in scope, covering approximately 9 million Canadians including seniors and those requiring social assistance. Provincial and territorial drug insurance plans vary considerably in eligibility criteria. For example, BC provides universal eligibility for drug coverage. 3 In Ontario, the Ontario Drug Benefit (ODB) Program provides coverage for seniors, social-assistance recipients, and residents of long-term care/special care facilities. 19 In general, most provinces and territories offer some form of catastrophic drug coverage, l but New Brunswick, PEI, and Yukon do not. The extent of catastrophic drug coverage, in terms of the payment limit for an individual, varies from province to province, in many cases based on family income. m, 20 Private drug insurance plans provide coverage for employees of organizations that offer drug benefits to their workers and for individuals who choose to purchase drug insurance independently. 3 Most private plans cover not only the employee, but also their family and dependents. Canada s federal and provincial governments as employers provide coverage for 3.2 million public servants and their dependents. 22 In addition to eligibility criteria, both public and private plans must determine the cost to be passed on to the beneficiary. Most provincial and territorial plans do not require their beneficiaries to pay premiums. Instead, these plans use deductibles and co-payments to help supplement taxation as a source of funding, with some exceptions. n,1 Also, most provincial and territorial plans use incometesting, varying their deductible and co-payment amounts based on the income level of the beneficiary. 3 Private plans also use deductibles and co-payments as part of their insurance policies. l Catastrophic drug coverage is defined as the provision of a general level of coverage that protects individuals from drug expenses that threaten their financial security or cause undue financial hardship. 20 m In Quebec, the upper payment limit for any individual is fixed at $ n Deductibles and co-payments also deter people from using drugs unnecessarily.

14 12 HEALTH COUNCIL OF CANADA Currently, public and private insurance plans account for approximately 82% of total prescription drug expenditures in Canada, while patients pay approximately 18% on their own. 1 Table 1 summarizes total drug expenditures and percentage of the total by each of the three groups: public plans, private plans, and out-of-pocket payments. TABLE 1: PRESCRIPTION DRUG EXPENDITURES BY PAYER IN CANADA (2009 ESTIMATE) Payer Total Prescription % of Total Drug Expenditures Public Plan $11.4 billion 45% Private Plan $9.4 billion 37% Out-of-Pocket $4.6 billion 18% Source: CIHI (2010). 1 (Note that the above figures do not include drugs paid through hospital budgets.) It should be noted that public insurance plans, providing coverage for only a third of Canadians, account for a disproportionately large share of expenditures. This may be due to their coverage of many high-use individuals mainly seniors and people on income support. Provincial and territorial governments are also the insurers for drugs consumed in hospitals and other health care institutions, 3 but these expenditures are not reflected in Table 1. Over the past few years, public-sector prescription drug expenditures as a percentage of total prescription drug expenditures were forecast to have fallen to 45% in 2009 from a 10-year high of 47% in The share of prescription drug expenditures funded by public insurance plans ranges from 32% in Newfoundland and Labrador to 63% in Nunavut, according to a 2009 estimate. 1 Table 2 shows the public-private split by jurisdiction. The out-of-pocket breakdown was not available at the provincial and territorial level and hence these expenditures are included under the private share of the market. The large variations among the provinces and territories are partly indicative of differences in eligibility requirements and beneficiary contributions. Reimbursement Policy A key decision for provincial and territorial governments is whether their policies will be formulated to apply to both public and private markets, or to public drug insurance plans alone. Currently, Alberta, Quebec, Manitoba, and Newfoundland and Labrador ensure consistent pricing across both spheres, 23, 24, 25, 26 and the proposed drug reforms in Ontario would also result in regulation for consistency across public and private plans. 27 Alberta s new drug strategy will ensure uniformity across public and private plans, whereas Quebec mandates minimum/maximum co-payments and deductibles. 23, 24, 25 In other jurisdictions, prices paid for the same generic drug may differ, in some cases substantially, between public and private plans. 28 Indeed, when governments apply pressure to reduce the costs of public plans, pharmacies may compensate by charging more to private payers, in those provinces where it is permitted. Reimbursable Drugs Drug insurance plans may use reimbursement lists, or formularies, to specify which brand name and generic drugs are covered. 3 Currently, all provinces use formularies. 29 To be listed on provincial and territorial formularies, generic products must have a valid NOC from Health Canada, and confirmation from the manufacturer of its ability to supply the product. 3 The actual reimbursement of the drug can occur at either the pharmacy level or the beneficiary level. Under some plans, pharmacies receive payment directly from the insurance provider and, if a co-payment is required, from the beneficiary. Under other plans, beneficiaries pay the pharmacy the entire cost of the prescription and later file a claim with their plan provider. 30 TABLE 2: PUBLIC-PRIVATE SPLIT OF PRESCRIPTION DRUG EXPENDITURES BY PROVINCE AND TERRITORY (2009 ESTIMATE) Market YT NT NU BC AB SK MB ON QC NB NS PE NL Public 64% 60% 63% 42% 47% 55% 46% 43% 49% 34% 39% 36% 32% Private 36% 40% 37% 58% 53% 45% 54% 57% 51% 66% 61% 64% 68% Source: CIHI (2010). 1 (Note that Private includes both private insurance plan and out-of-pocket expenditures incurred by Canadians.)

15 GENERIC DRUG PRICING AND ACCESS IN CANADA 13 In addition to determining which drugs are eligible for reimbursement, policies can also specify the degree of interchangeability between generic and brand name. The designation of generic interchangeability is under provincial jurisdiction and varies greatly across the country. Many provinces have expert advisory committees which review generic drug submissions and determine whether they are interchangeable with the brand comparator. Most jurisdictions accept Health Canada s Declaration of Equivalence as the primary basis for interchangeability. Some provinces have introduced streamlined review processes for certain generic drugs which involves an administrative rather than a committee review. For example, interchangeability laws can make dispensing of the lowest-cost interchangeable products mandatory. As of 2007, only Saskatchewan, Manitoba, PEI, and Newfoundland and Labrador had mandatory interchangeability. Interchangeability laws can also permit but not require pharmacists to interchange products, as was the case in the other six provinces. Pharmacy profits on generic drugs are often greater than on brand name products, so the pharmacy has a financial incentive to substitute generic for brand. 3 Table 3 shows the number of generic drug prescriptions as a percentage of total drug prescriptions for each province. 6 To encourage its brand name pharmaceutical industry, Quebec reimburses the full price of brand name drugs for 15 years after they have been listed on the provincial formulary, even after generic versions have entered the market. This reimbursement policy differs from that of many other provinces, which usually require the patient to pay the difference between the brand name and generic drug. 3 As a result, the use of generics versus brand name drugs is lowest in Quebec. TABLE 3: PERCENTAGE OF GENERIC DRUG PRESCRIPTIONS VS. BRAND NAME IN 2009, BY PROVINCE AS A PERCENTAGE OF TOTAL PRESCRIPTIONS (FOR BOTH HOSPITAL AND RETAIL MARKETS) BC AB SK MB ON QC NB NS PE/NL Generic 59% 57% 57% 61% 56% 50% 61% 56% 59% Prescriptions Source: Canadian Generic Pharmaceutical Association (2009). 6 (Note that information for the Northwest Territories, Nunavut and Yukon was not available.) Over the past five years, the number of generic drug prescriptions as a percentage of total drug prescriptions has grown steadily. For each province, the percentage of generic drug prescriptions was between 10% and 12% higher in 2009 (Table 3) than it was in Several mechanisms are in place to assist public plans in making formulary decisions. The Common Drug Review (CDR), which is funded by the federal, provincial, and territorial governments and conducted by the Canadian Agency for Drugs and Technologies in Health (CADTH), looks at the costs and benefits of drugs on behalf of all Canadian jurisdictions except Quebec. It conducts reviews and makes formulary listing recommendations to public plans based on a clinical efficacy and a value-for-money assessment. 31 However, there can be long delays between the CDR recommendation and the decision to list on the public drug plan formulary. Drug Reimbursement Prices For each generic drug listed on a plan formulary, a set of policies determines the appropriate price for reimbursement. The reimbursement price specified in the formulary directly regulates the price that is charged to the insurance provider. To determine the drug price specified on the formulary, plan providers typically use one or more of the following approaches: capping the formulary price at a percentage of the brand name price; specifying a maximum reimbursable cost for a drug or group of interchangeable drugs; linking the price to that of a therapeutically equivalent reference drug; o or determining the price through a competitive tendering process with manufacturers. Public and private insurers in Canada use price caps and maximum-reimbursable-cost policies extensively. Very few of them use tendering on a regular basis because pharmacies have the ability to discourage low bidding. Hospitals, however, use tendering extensively to obtain competitive prices for their supply of generic drugs. 28 Price Caps Insurers can set a maximum price for reimbursement by listing each drug on the formulary at or below a percentage of the reference brand name drug price. For example, Alberta, Ontario, Quebec, and Newfoundland and Labrador use this approach by setting the price of generic drugs as a fixed percentage of the brand name prices. 3, 23, 26 In Alberta, this fixed percentage is 45%. In Ontario, it is currently 50%, but is slated to drop to 25% by 2014 as part of the province s proposed drug reform. 27 As of 2007, reimbursement policies in Quebec and Newfoundland and Labrador follow a similar approach, but incorporate an additional constraint that pegs the reimbursement price for a particular generic to be no more than the lowest price found on any other provincial formulary for the same drug. 3 o A reference drug is a drug that is considered to produce an equally effective outcome and be the most cost-effective in a particular category of drugs. 32

16 14 HEALTH COUNCIL OF CANADA Maximum Reimbursable Cost Under maximum-reimbursable-cost policies, drug plans use the cost of each generic drug to determine an appropriate formulary price. 33 The cost of each generic drug can be obtained from manufacturers, as is done in Manitoba, Nova Scotia, and other provinces. Manufacturers submit their retail prices to the drug plan, which then determines the appropriate formulary price usually the lowest price for an interchangeable group of drugs. Similarly, the cost of each generic drug can be determined based on the pharmacy s average claimed prices, as is the case in British Columbia. 3 Manitoba recently implemented an additional requirement for generic manufacturers wanting to be listed on the provincial formulary: they must include a price-benefit analysis of the product, and a declaration that the submitted price is less than or equal to the price of that product in any other province or territory. If a generic company submits a higher price, it must explain the additional benefits the product offers over other products in its interchangeable group. 28 Reference Pricing Reference pricing means using the lowest-priced drug among a group of therapeutically equivalent drugs to set the formulary reimbursement price. Therapeutic equivalence commonly refers to drug products that, when administered to the same person in the equivalent dosage regimen, result in essentially the same therapeutic effect, and/or toxicity. 34 British Columbia is one Canadian jurisdiction which has adopted therapeutic-reference pricing for five groups of drugs: non-steroidal anti-inflammatory drugs (NSAIDS); nitrates; histamine-2 blockers; angiotensin-converting enzyme (ACE) inhibitors; and calcium-channel blockers. 35 Tendering Tendering involves the use by drug plans of competitive bidding processes to establish the price that will be reimbursed for a particular drug. The insurer can make the manufacturer with the lowest price the sole supplier of that drug for all plan beneficiaries or choose more than one manufacturer so as to safeguard supply. p Only one Canadian provincial plan, Saskatchewan s, practises tendering extensively, using it to determine the price of 91 high-volume interchangeable drug groups. 3 Other provinces, including BC and Ontario, have used tendering on a very limited basis. 28 For example, BC used the tendering approach to sole-source olanzapine 12 (brand name: Zyprexa ), an off-patent prescription drug for treatment of schizophrenia, bipolar disorder, and related symptoms. 36 Other Reimbursable Costs In addition to reimbursing the cost of the drug, public and private insurance plans also reimburse, to a certain extent, other costs associated with drug-dispensing activities. Dispensing services include checking the prescription for errors, filling the prescription, and providing information on appropriate medication use. 37 The fees paid for these services vary from provider to provider. Insurers may also choose to reimburse a mark-up amount that is proportional to the drug s invoice price. For instance, if the invoice price of a drug is $25.00 and the allowable mark-up is 10%, the pharmacy will be reimbursed $27.50 plus the dispensing fee. Mark-ups also tend to vary from provider to provider some provincial and territorial plans do not reimburse mark-up amounts at all, while others reimburse them at 7 10% of the drug s invoice price. 37 Reimbursement for medical counselling fees, as distinct from dispensing fees, is becoming more common among public insurers in Canada. This means remunerating pharmacists for patient-counselling, independent of any dispensing services. For example, Ontario has introduced MedsCheck, a medication review program that compensates pharmacists for reviewing the medication use of patients who have a chronic condition and use three or more prescription drugs. 37 Alberta is currently pilot-testing a new pharmacistcompensation model which may introduce separate funding streams for non-dispensing professional services (e.g. counselling and, due to new regulations, prescribing). 38 Rebates Within the existing reimbursement framework, manufacturers have provided pharmacies with rebates q off invoice prices. Rebates are a by-product of the existing reimbursement framework. 3 Over time, however, they have become an important source of revenue for pharmacies. Ontario and Quebec have created policies that specifically target the use of rebates. 3, 12 Quebec initially banned rebates entirely, but has since permitted a rebate equal to 20% of generic sales, provided that this money be used for patient-related professional services. Similarly, Bill 102 in Ontario replaced rebates with professional allowances and capped them at 20% of the drug s invoice price with a similar provision that the allowance must be used to fund patient-related professional services. 12 However, under the Ontario drug reforms announced in April 2010, all rebates or professional allowances would be completely eliminated by p In reality, supply is unlikely to be an issue. Brand name firms, under patent, are the sole suppliers of innovative drugs. Generic firms, on the other hand, can be one of many suppliers to the market. In an emergency, generic products can be substituted for their brand name equivalents, and vice versa, if supply was ever to become an issue. q Rebates are discussed in more detail in Section 4 of this paper.